Given the dramatic hike in both NPAs as well as bank loans in trouble, and their large concentration in the infrastructure space, it is not surprising the government is anxious to fix this. If the banking sector continues to be plagued with bad and doubtful loans, its ability to lend further will be constrained—as compared to 17-18% growth rates in the past, credit growth is currently in the 13-14% range. In the power sector, since a large part of the problem is related to lack of fuel linkages, the power minister has decided to reduce the e-auctions of Coal India Limited (CIL) in an attempt to ensure lower fuel prices for power plants; never mind what this does to CIL’s profitability. The greater coordination with the environment ministry, similarly, is aimed at ensuring green clearances are provided at the earliest; with these not forthcoming, projects are not getting completed in time, and this is a reason for bank loans turning bad.

Any clean up, however, has to be carefully thought out. One of the plans being talked of, by financial services secretary GS Sandhu last week, is to set up an asset reconstruction company (ARC) where public sector NTPC will be the majority equity holder. Banks will sell bad power loans to the NTPC-ARC—banks will be minority share holders—which will then be tasked with turning them around and, if all goes well, sell them at a profit over a few years. A similar ARC is planned for stressed highway projects, and the National Highways Authority of India (NHAI) will be the principal sponsor of this one. Obviously the banks’ ability to get the bulk of their money back will depend upon how soon the ARCs can turn the projects around and sell them at a profit or as close to their book value. How safe NTPC/NHAI’s balance sheets will be depends on how much of a haircut the banks are willing to take while transferring the assets to the ARCs. Given that such ARCs are typically set up by private equity players with specific turnaround skills, it is doubtful if this is either NTPC/NHPC’s core area of strength. And were the banks to take over the assets—the most fundamental road block—and sell them at enough of a discount, private ARCs would have bought them long ago. Given how a government whim forced PSUs MTNL and BSNL to pick up expensive